Fiscal foresight and the effects of government spending: It’s all in the monetary-fiscal mix

Abstract

Announcements of future government spending have different effects on economic activity depending on the monetary-fiscal policy mix. Upon announcement, they are contractionary in the monetary regime but expansionary in the fiscal regime, in contrast with the expansionary nature of government spending at implementation in both regimes. Anticipation effects can therefore help empirically distinguish between the two regimes. Data support our theoretical insight, reconciling conflicting results in the empirical literature that disappear once conditioning on the policy regime. This evidence suggests that it could be (un)wise to anticipate future fiscal policies, depending on the regime in place.